ECR Survey Results Q2 2016: Global risk hits new high as Brexit adds to China and EM concerns

The UK’s decision to withdraw from the EU has opened a Pandora’s box for global investors at a time when commodity prices are depressed, sovereign bond yields are sinking to new lows and prospects are still dimming for many emerging markets (EMs).

Hidden agenda: But countries’ decisions have had a huge domino effect in H1 2016

The UK’s risk score has fallen in concert with its credit ratings as experts weigh up the implications of the shock June 23 referendum result.

Although Brexit might provide longer-term advantages, the political fallout, uncertainty over future trade relations and Scottish independence, plus the impact on financial services and real estate, have sent Europe’s hitherto improving risk outlook into a spin.

ECR expert Johan Krijgsman says: "Brexit is a crisis for the UK, but it is also one for the EU.

"At a mundane level, the EU budget must find €7 billion. More importantly, Germany loses an ally favouring freer market conditions, and deeper economic and political integration is likely no longer on the table."

Another survey contributor, Christian Richter, says: "Nobody knows at this point in time for how long this uncertainty will last. Likewise, an economic recovery is unlikely."

The UK is one of several EU member states to become riskier with economic and financial market stability in doubt, as risk aversion piling pressure on bond yields creates a rush for gold and other safer assets.


Clamour for the Swiss franc as a safe haven is undermining economic growth prospects and means Switzerland’s score – counter-intuitively – has fallen sharply. Relations with the EU are now even more uncertain following the 2014 Swiss referendum coming out against mass immigration, a binding plebiscite that must be implemented by February but is complicated by a bilateral protocol establishing the free movement of labour.

Risk scores for France, Finland, Italy and the Netherlands have all fallen as the Brexit outcome raises the prospect of similar referendums taking place eventually, as high unemployment and unending austerity fuel the rise of the Eurosceptic, populist-right.

Investor safety in Belgium, Luxembourg, Cyprus, Ireland, Hungary and Poland has taken a hit, but not in Germany, or indeed Spain where political risk is calming and the economy booming, fuelled by tourism.

Neither is it a problem in all countries across Eastern Europe, as Bulgaria, Romania, Slovakia and Slovenia’s improving fortunes attest.

Record number of downgrades

This year has already seen a record number of sovereign rating downgrades: 14 by Fitch, 16 by Standard & Poor’s and 24 by Moody’s, highlighting waning creditworthiness across the globe. Euromoney’s survey merely suggests there are more rating actions in the offing.

The survey has a longstanding favourable track record of predicting credit rating actions as experts’ views change quickly, pre-empting the rating agencies’ announcements.

The views of more than 400 economists and other experts from a range of financial and other institutions are collated, evaluating the risks faced by international investors in 186 markets, scoring across a range of political, economic and structural criteria.

These scores are added to values for capital access, credit ratings and debt indicators, and are aggregated each quarter to provide a total risk score.

Wide-ranging problems

The rise in investor risk is a broadly worldwide phenomenon, which might become worse with Europe’s outlook uncertain, China’s worries lurking in the background and the US elections pending.

Only two countries in the G10 are considered safer this year than last: Canada and Sweden. The US, Japan and most other countries are marked down.

In all, no fewer than 97 of the 186 countries surveyed by Euromoney have been downgraded by risk experts so far this year, with capital access tightening for 62 sovereign borrowers.

Political risk has increased for 88 countries and is spreading from less developed countries to the more advanced, industrialized world.

The average country risk score has fallen to 42.7 out of a maximum 100 points, remaining well below 50 points since the global financial crisis struck in 2007/08.


Referendums in Hungary (on EU refugee quotas) and notably in Italy (on constitutional reform) are huge risks coming down the line this year, say Citi economists taking part in Euromoney’s survey, illustrating how political issues are complicating portfolio selection as much as economic or structural indicators.

EMs offer little sanctuary

With commodity prices in retreat, putting currencies under pressure, many of the world’s EMs have succumbed to increased risk this year.

The resource slump, combined with persistent, devastating drought conditions, institutional failings and donor fatigue mean Africa’s problems particularly have magnified.

Nigeria, Mozambique, Kenya and South Africa are among the numerous sub-Saharan countries downgraded this year as fiscal problems arise from worsening export earnings and mounting liabilities, with the positive impact of multilateral debt forgiveness a decade ago beginning to fade.